China’s biggest event of the year set to kick off

A solder stands guards in front of the Great Hall of the People where the National People's Congress is slated to be held in Beijing.

LOS ANGELES (MarketWatch) — Americans often complain about how little time the U.S. Congress actually spends in session, what with trips to representatives’ home districts and frequent recesses.

But consider China’s legislature, known as the National People’s Congress (NPC). It meets only once a year for just two weeks. Yet when it does, the rest of the world gets a glimpse into what Chinese leaders are thinking and planning.

That once-a-year session is set to kick off Wednesday, and it will no doubt make news, all the more so this year as this will be the first such convening since the Communist Party Plenum late last year, where President Xi Jinping unveiled the nation’s plan for the decade ahead.

The NPC’s main job is translating decisions from the party into legislation. It meets alongside a second body — the Chinese People’s Political Consultative Conference, which nominally includes delegates from outside the Communist Party — but the NPC is main show.

One of the big events of the session will be Premier Li Keqiang’s working report, at which the bespectacled 58-year-old party veteran is slated to announce China’s economic targets for the year.

The consensus is that Li will keep the goals for economic growth and consumer inflation unchanged from 2013, at 7.5% and 3.5%, respectively. Such has been the signals in Chinese media, which tend to be accurate, so anything to the contrary will be a surprise and very likely to move the markets.

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But Barclays economist Jian Chang says Li could hold the targets steady but still do something unusual: provide a sort of Chinese forward guidance.

“It will … be interesting to see whether Premier Li seeks to guide market expectations, such as introducing discussions relating to a bottom-line for growth,” she wrote in a recent note. “Many investors, think-tanks and government officials we have spoken to agree that China’s growth rate faces downward pressure, hence a lower target for 2014 (such as 7%) would be more realistic.”

Beyond the target announcements, political and market observers alike will watch for any news on implementing the reforms trumpeted at last year’s Plenum.

“Issues likely to receive attention include health-care reform, anti-pollution measures and urbanization policy,” Capital Economics said in its preview of the NPC session.

Urbanization reform could involve allowing China’s millions and millions of migrant workers to access public services in the cities where they work, rather than solely in their places of birth, as is generally the case under the nation’s current household-registration, or “hukou,” system.

“Also worth listening for are policies affecting state-owned enterprises (SOEs),” Capital Economics said. “There appears to be more momentum on SOE reform than seemed likely a few months ago. A number of provinces have already released guidelines for changing how SOEs are managed.”

Many economists outside China have long criticized SOEs as dragging on economic growth, as they are beholden to political interests and are often propped up by the government, stifling competition.

How much clarity the NPC offers on these reforms is an open question, however.

HSBC economists Qu Hongbin and Sun Junwei said that, aside from the targets and the 2014 budget report, many of the key details will begin cropping up after the NPC session concludes.

And the reform could come piecemeal, such as with the urbanization reform, where Qu and Sun predict “the hukou policy … will be eased in smaller cities, while the social-welfare system will be adjusted for migrant workers,” rather than a full-scale abolition of the hukou system itself.

While health care, pollution and the hukou system will likely feature in the NPC meeting, some other promised reforms — particularly those of the financial markets and economic structure — may get glossed over, as Beijing takes a go-slow approach.

“Reforms that involve divergent opinions and interests or those which could incur greater risks to financial stability or require greater policy coordination are lagging, such as the central-local government relationship, financial liberalization and regulating the shadow-banking sector, tackling local-government debt, and land reform,” wrote Barclays’s Chang.

Unfortunately, many of these financial issues are seen by China economists as ticking time bombs.

The soaring level of local-government debt, for instance, could erupt into crisis if the municipalities have trouble repaying money owed to state banks. The much-discussed solution could involve allowing local governments to issue their own bonds — something currently prohibited. But Chang says that, “while we think this is the right direction, we believe the NPC will impose pre-conditions before giving the green light.”

On the other hand, Bank of America-Merrill Lynch economists Ting Lu and Sylvia Sheng think the NPC will address the municipal-debt situation.

“We expect local governments will be legally allowed to run fiscal deficits to finance public projects and will be officially given the access to banks and capital markets during the NPC meeting,” they wrote, adding that the legislature might also clamp down on local borrowing by making provinces responsible for the debt of lower-level local governments.

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